Opportunity knocks for the hotel hospital

All talk at the moment is of cut backs and job losses, but we should not let opportunities pass just because we are in a downturn.

Today saw the announced closure of the 120 room Castletroy Park Hotel in Limerick. It is also felt that many more large hotels will close over the next few months as there is huge over-supply in the market.

What to do with these assets? Turn them into modern hospitals. They have the same design as hospitals - reception, rooms, suites, kitchens, parking. It would require a major refit but most modern hotels are designed to be updated easily. Many of these are in excellent locations served by public transport.

With a little investment they could be converted into some long-term care facilities. With a little extra some of them could become specialist care centres in key areas.

With some predictions of one hotel a week to close during 2009 there will be a choice of locations and facilities to choose from. When opportunity knocks open the door. Tweet

Negative interest rates are here

Why should interest rates have a lower bound of zero? We've already seen that some UK mortgages may have negative rates shortly, but this was not by design and more a result of falling base rates.

Fiat Ireland have a finance offer that has a negative interest rate - and they meant it! Details of the offer can be found here. For example if one was to buy a Fiat Bravo over 36 months with a 30% deposit or trade in the sums are:

Bravo 1.6 MultiJet Eco Active
RRP: €20,375
Deposit/Trade In: €6,115
Finance Amount: €14,260
No. of Months: 36
Monthly Repayment: €390.00
* Cost of Credit: -€220.00
APR: -1%

This is just another example of the deflation we are likely to see over the next 12 to 18 months. In a sense they could have just cut the price by €220 and offered a 0% APR finance deal. This would amount to the same thing.

But it does show that negative interest rates are entirely workable. Will any central banker be willing to take the ultimate plunge? Tweet

In up to their necks

The government have been issuing revised Budgetary Projections for the next five years. They can be found in the addendum to the Stability Programme Update here. It does not paint a pretty picture. The 2008 outturn and five year projected figures for the General Government Balance in million are (with % of GDP in brackets)

2008: -€11,796 (-6.3%)
2009: -€17,165 (-9.5%)
2010: -€16,271 (-9.0%)
2011: -€12,092 (-6.4%)
2012: -€9,443 (-4.8%)
2013: -€5,537 (-2.6%)

These suggest that over six years we will have to borrow in excess of 70 billion (provided the cumulative annual "adjustments" of €16.5 billion that have also been announced can be found over the same periods).

However, our debt is low to begin with and our debt to GDP ratio is predicted to stabilise at around the 60% level.

But what if we compare the deficits not to GDP (and one could argue that GNP would be a better measure for Ireland) but compare it to Government Revenue. The following ratios give Total Expenditure (Current and Capital) as a percentage of Total Revenue and also assume that annual "adjustments" aren't achieved.

2008: 134%
2009: 157%
2010: 165%
2011: 165%
2012: 166%
2013: 161%

These are truly staggering. To quote one of our late Taoisigh "we are living beyond our means". To bring it to an individual level this is like someone with an income of €37,500 trying to maintain an expenditure level of over €60,000. Impossible!

Government expenditure has become totally removed from government income. If by some chance the government does manage to find €16.5 billion in cumulative annual adjustments the ratio for expenditure to income will still be 123%.

If you look at the adjustments from 2009 to 2013, the government is looking to cut projected expenditure (i.e. under current conditions) by a combined total of €48 billion over the five years. As to how this will be done. Nobody knows!

So the plan for the next five years is to cut planned expenditure by almost €50 billion (and not €16.5 billion as the Taoiseach is saying). And even if that is achieved there will still have to be additional borrowings of almost €70 billion. You know what they say, "a billion here, a billion there and pretty soon you're talking about some real money". 120 billion is a real number. Tweet

Where did the money go?

The Irish banks are in crisis. Anglo has already been nationalised while AIB and BOI are also under pressure.

One of the biggest problems is their loan books. It now appears that a large portion of the loans they have issued will turn out to be 'bad'. Estimates vary hugely but the bad debt provision for Anglo has been said to be between €20 and €30 billion. More precise figures would be nice!

Anyway one issue that emerges is: Who has this money? These loans may never be repaid but it is real money that was given to someone. In the case of Anglo it seems that a lot of loans were issued to property developers.

A lot of this money will have been spent. The biggest beneficaries will have been the land owners who sold the land to the developers. Construction workers, engineers, solictitors and others associated with the sector will also have got a share for work done. The government will also have taken in some through various taxes; stamps, capital gains, income, and VAT.

Without doubt there has been a huge transfer of wealth but who got the loot and who will pick up the tab? Tweet

Income elasticity of demand

Today bring us reports on two contrasting retailers in the Irish grocery market. Courtesy of RTE.ie we have

• 21% sales increase for Aldi stores in 2008
• Superquinn to lay off 400 workers

These firms aim for different segments of the grocery market and it may be that Aldi sells inferior goods (in the economic sense) and Superquinn normal goods (again in the economic sense).

An interesting study found similar results for Walmart and Target in the US using data from the two retailers. The paper can be read here with the title "Does Walmart Sell Inferior Goods?" The paper was written in April 2008 and WSJ reports in November on the two companies confirms the findings.

• Walmart flourishes as economy turns sour
• Target profits continue to slide

For those looking for the meanings of the terms used above we can turn to wikipedia: Normal goods, Inferior goods, Luxury goods and the oft sought for but seldom found Giffen goods which have been traditionally (but incorrectly) associated with potatoes and the Famine times.

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